S-REITs to generate yields despite economic weakness

The average yields of S-REITs have bounced back to around 5.5%, despite seeing a 6.5% decline in prices early in the year, according to DBS Group Research. This figure implies a spread of over 4% against the Singapore 10-year bond yields.

“The broad-based sell-off in S-REITs of up to 4-5% in a day is certainty noteworthy,” said Derek Tan, an analyst at DBS Group Research. “We see [this] as an opportunity to accumulate S-REITs on expectations that the low interest environment and high headline yields will attract investor interest back to S-REITs after the market stabilises.”

The report stated that their preference includes industrial S-REITs because of their longer weighted lease expiry (WALE) supporting distributions. Office REITs, including US office REITs, are also attractive as their potential acquisitions may drive distributions higher.

As for hospitality REITs, the report cited Ascott Residence Trust (ART) and Far East Hospitality Trust (FEHT) as having high fixed rents (up to 70% of revenues) which limited the current downside risks. ART and FEHT were projected to deliver yields of up to 4.7% and 4.9%, respectively.

“In the medium term, we believe S-REITs will continue to be an important and relevant component of investors’ portfolio, especially given the sector’s increasing representation in major indices (current and future) such as the MSCI, STI, and the EPRA Nareit Developed World Index. Coupled with high yields of 5.5%, investors will eventually be drawn back into the S-REITs sector,” Tan added.

Healthy margins

S-REIT investors need not worry about the possibility of facing margin calls as well, as large-cap stocks are finding greater demand, despite the lower absolute yield. The average leverage ratios have also been conservative.